In spite of all the weakness in global and local equity markets, the Portfolio successfully navigated itself through the volatility and produced a positive return for the quarter. Equity (-20.6%) was the worst performing local asset class as the rapidly unfolding financial crisis and fears of a global economic slowdown drove prices lower. Interest rate sensitive assets like bonds (+12.6%), property (+23.1%) and income (+6.7%) all performed well as investors started anticipating the peak in inflation, pricing in rate cuts in early 2009. Cash (+2.8%) was solid as usual and exposure to all these assets more than offset the negative returns of the local equity market. Over the past 12 months the fund posted a small positive return for investors and pleasing the Portfolio was ranked in the top half of its category peers. The Portfolio is ranked 9 / 34 over the past 3 years.

Much of the positive return for the quarter and general improvement in the Portfolio's ranking can be attributed to asset allocation. The Portfolio is very defensively positioned at the moment with roughly 75% in cash. Only 18% of the Portfolio is exposed to equities, down from over 50% in October 2007. Pleasingly all managers produced positive returns for the quarter, underscoring the protection mechanisms used by these managers. Prescient has been the best performing manager over the past year primarily due to a portfolio consisting more than 90% in cash. Independent of the underlying managers, we also actively put around 15% of the Portfolio into a money market fund during the quarter for additional downside protection and this has certainly helped more recently.

Going forward we believe that markets will continue to be driven by uncertainty and fear of the unknown. We are closely monitoring the impact that the recent government intervention has on the credit market and will be looking for evidence of an improvement in the US housing market before deploying our excess cash.

It was a very similar quarter to the 1st given that there were few places for investors to hide. A handful of equities ensured that the equity market (+3.4%) finished in positive territory for the quarter but the vast majority of shares declined in line with the deterioration in global sentiment and an increase in risk aversion. Bonds (-4.9%), income (-1.3%) and property (-19.6%) all suffered under the pressure of higher interest rates and a surge in inflation, which reached 10.9% in April. Cash produced a safe 2.9% for the quarter and it was unsurprising to see the underlying managers in general lowering their equity positions and raising cash holdings now yielding around 13% p.a. The Portfolio produced a marginal negative for the quarter but remains well ranked in its category over the past 3 years (11/32) with a return of 13.3% p.a.

Both Prescient and OMIGSA produced positive returns for the quarter given their defensive positioning and downside protection assets. Whilst Coronation produced a negative return it is important to note that they provide the Portfolio with amore aggressive tilt which will benefit the Portfolio (as it has done in the past) when equity markets recover. Their value philosophy will also kick in when many of the out of favour stocks and sectors recover and we anticipate that this will coincide with the top of the interest rate cycle.

The current asset allocation of 20% equity, 71% cash, 4% bonds and 5% property reflects a weak and volatile environment and we are pleased to see the managers holding enough cash to take advantage of the value opportunities within equities that are bound to arise in times like these. As such we would expect to see the effective equity exposure rising as the year draws to a close.

Equities (+2.9%) produced positive returns for the quarter but this was masked by the significant out performance of Resources (+17.8%) over Financials (-12.8%) and Industrials (-6.4%). In reality the average general equity portfolio produced a return of -2.5% for the quarter. Interest rate sensitive assets like property (-10.9%) and bonds (-1.9%) also struggled following surging inflation and the threat of higher rates. Cash (+2.6%) was really the only safe haven. The Portfolio produced a marginally negative return for the quarter but produced a positive return over the past year. It now has a 3-year track record and in this time has produced a 14.5% return per annum (3.3% p.a. ahead of our performance objective) where it was ranked 12 / 23 amongst its peers.

Prescient was the only manager to produce a positive return for the quarter thanks to a good exposure to resources within their equity component, no bond exposure and large cash holdings. Both OMIGSA and Coronation produced negative returns, but Coronation more so because of their higher equity content and negative alpha in their stock picks. Clearly the positions of Coronation and Prescient are designed to balance each other off to provide more consistent returns over time. Investors will recall that not so long ago Coronation was the star performer relative to Prescient. As a multi-manger we did actively down weight Coronation during the quarter by 10% to mitigate against portfolio and market risks.

Following the release of disastrous inflation figures in February (CPIX: 9.4%), analysts have undoubtedly revised up their inflation targets and shifted out the peak. Inflation will remain higher for longer and this is having an impact on the underlying management of the assets, which has become more conservative in its approach. Whilst we are confident of beating our benchmark (CPI) it may transpire (at times in 2008) that we marginally under perform our rolling three year performance objective should inflation continue higher and markets continue lower.